However, the Dow Jones ended up 21.16 points at 11,972.25 after tumbling 194 points at the start of trade as investors took heart from JP Morgan's takeover of Bear Stearns, which was backed by the Federal Reserve.

"Investment banks are getting their heads handed to them, but at the end of the day the Federal Reserve is stepping up every time and creating a process by which the markets will be allowed to recover," said Michael Williams at Tocqueville Asset Management in New York.

The investment bank was forced to seek emergency funding from the US Federal Reserve last week and was sold over the weekend to JP Morgan Chase for a tiny fraction of its earlier value.

The Fed has agreed to take over up to $30bn of Bear Stearns' assets, removing the risk for JP Morgan.

The quick sale failed to calm investors' nerves who, this week, will receive earnings announcements from other big US investment banks, including Lehman Brothers, Goldman Sachs and Morgan Stanley.

"There is persistent credit uncertainty. Market players have been repeatedly let down which shows the sub-prime mortgage problems are so deep-rooted," said Atsuji Ohara, global strategist at Shinko Securities in Tokyo.

"Just buying an investment bank does not solve the problem," he added.

Dollar woes

Worries about the credit crisis and the health of the banking industry also undermined the dollar.

It fell to 95.72 yen, its lowest level in more than 12 years. The euro hit a record against the dollar, buying $1.5904.

The weak dollar boosted commodities, with oil rising to another record, light sweet crude traded at $111.80 before falling back.

The dollar is also falling because of the expectation that the US Fed will cut interest rates further, making it less attractive to hold dollars as opposed to other currencies.